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Forget Interest Rates. It’s The Fed’s Balance Sheet That Matters

Aaron Levitt Oct 01, 2017

We all know that the Great Recession and credit crisis was terrible.

Millions of people lost their jobs, homes were foreclosed, and the world’s economy sputtered into a deep funk. Given the severity of the problem, governments, and central banks pulled out all the stops in order to save and restart the global growth engine.

In the U.S. that meant driving benchmark interest rates into the ground as a way to get people to spend money, invest in new businesses and take on cheap debt. But the Fed also did something else: it started buying bonds. Trillions of dollars’ worth of bonds to be exact.

The quantitative easing (QE) programs were designed to take up any bond in the marketplace and force investors to look elsewhere, or to hopefully spend that money to jump-start the economy.

The problem is that now the Fed wants to start selling these bonds on the marketplace. For income seekers, this could be a huge deal. In fact, a much bigger deal than the recent raises to benchmark rates.

Stay up to date with the highest-yielding stocks and their latest ex-dividend dates on our High Dividend Stocks by Yield page.

A Whopping $4.5 Trillion

With lower benchmark rates not moving the needle, Ben Bernanke and the Federal Reserve looked for some radical solutions. And with that, they looked toward an old Keynesian economic theory. They started buying bonds with the idea of pushing real yields lower and lower. This forced investors to look elsewhere for inflation-beating returns. What they hoped for was that investors would be willing to invest in new businesses or the real economy. Low rates would allow businesses and individuals to borrow cheaply and spur on the economy.

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